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Thomas, Frank W. 


Cost accounting in a bank 









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Thomas, Frank W. 

Cost accounting in a bank, by F. W. Thomas ... To- 
ledo, 0. [Press of the Bankers publishing eo.] 1910. 

52 p. incl. port. 24^". 52.00 ] 

1. Banks and banking — Accounting. 

Library of Congress 





©Sept. 27, 1910; 2c. Oct. 1, 1910 ; A 273128; F. W. Thomas, Toledo, O. 

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By F. W. THOMAS,- 

The Bankers FuUishing Company. 





Copyright 1910 
By F. W. Thomas. 

All Publication Rights 

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Necessity for Cost Accounting in A Bank, - - -5 

General Principles of Cost Accounting in a Bank, - - 11 

Application of these principles to the conditions of The Specimen 

National Bank, - - - ... 15 

Analysis of Individual Accounts in The Specimen National Bank, 22 

Analysis of General Conditions affecting earnings of savings accounts, 23 

Special Conditions to be met in the Cost Accounting of a Central 

Reserve City Bank, - - - - - 29 

Analysis of an Account in a Central Reserve City Bank, - 30 

Special Conditions in an Ordinary Reserve City Bank, - 3 1 

Method for analyzing accounts in The Specimen National Bank, on 
which are deposited an abnormal number of out-of-town 

items, --..•.; 32 

Specimen Analysis of such an account, - - - 34 

Form of blank showing comparative statistics for cost purposes, 36 

Cost Accounting in a Trust Company, illustrated with actual figures of 

the Average Trust Company, - - - 38 

Utilizing the Results of Cost Accounting, - - 43 

Analysis of Advertising Methods in A Bank, - - 47 

Method for computing average daily amount in transit, - 51 

Counting Items, - - r - - 51 

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The Necessity for Cost Accounting in a Bank- 

An Address Delivered b\f F. W. Thomas, President of the Bankers 

Publishing Company;, of Toledo, Ohio, Before the Ohio 

Bankers Association at Columbus, June 7th, 1910. 

The actual money furnished by the Government for the con- 
duct of business is sufficient for only about five per cent, of our trans- 
actions. The remaining ninety-five per cent, are handled by checks 
and drafts furnished by the banks. All the vast machinery needed 
for the handling of these checks and drafts, for their transfer from 
party to party, in the same city, or in a remote city, is operated by 
the banks, usually with no specific charge for this service and rvith 
no adequate system of accounting for determining whether or no 
they secure a proper recompense. 

The mere handling of items is the smaller part of a bank's busi- 
ness and yet in this one feature, usually looked upon as not worth 
accounting, the banks of this country render a service that actually 
costs them, as nearly as can be estimated, at least one hundred mil- 
lions of dollars annually. 

In the broader phases of banking, — the relation of balances to 
the cost of handling money, making loans, and other services ren- 
dered to customers, — costing the banks of the United States fully 
two hundred millions of dollars additional, — there is almost a total 
disregard of any exact basis for determining the profit line. 

Here is, then, one of the largest and most indispensable busi- 
ness organizations in the country, a vast co-ordinate service, costing 
about three hundred millions annually, that is operated on a basis 
almost utterly regardless of adequate profit from the individual cus- 
tomer, and trusting largely to luck that the business as a Tvhole will 

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carry the burden. And the banks do carry diis load and do pay 
dividends, but often not commensurate with the profits of other lines 
requiring less ability; and certainly with less profit than would be 
realized if ever}^ customer paid a fair compensation for the service 
he receives. 

The customer's balance, the use of which is supposed to rep- 
resent the bank's compensation, is often more fictitious than real. It 
is often partly, sometimes fully and occasionally more than offset 
by items in transit, so that without an accurate analysis, the cus- 
tomer's balance, as it appears on the books, is a very deceptive meas- 
ure of the true value of his account. 

The banker stands as the business counsellor and often as the 
critic of the business and financial operations of his customers. 

A country banker faced by a farmer debtor who had a herd 
of a dozen cows showing a loss would probably suggest the purchase 
of a Babcock tester and the elimination of the cows that did not 
produce a profitable percentage of butter fat. 

A city banker with a delinquent manufacturer on his hands 
would probably ask that man whether his whole business was un- 
profitable or whether there were certain lines that he could follow 
and produce a profit, cutting out the unprofitable lines; and if the 
manufacturer should tell him that he could not tell which Imes were 
the losing and which the profitable ones, the banker would probably 
wish to cast that man into outer darkness. 

And pe/ manp banks do not kriow hoiv much of their total net 
profit is produced by the commercial department and how much by 
the savings department. 

And many accounts with apparently very large balances are 
really unprofitable when correctly analyzed. 

The necessity of a cost system in a bank is greater than in al- 
most any other business owing to the narrow margin of profit on the 
gross amounts handled in banking, and the demonstrated fact that 
much business is now being handled without profit or at an actual 


loss because of a lack of positive, definite knowledge of costs and 
the consequent lack of intelligent effort to remedy these conditions. 

A great deal of interest is now manifest in this subject. One 
by one the central reserve and ordinary reserve city banks are put- 
ting such a system into practical use and requiring of their bank cus- 
tomers an amount of balance based on correct costs. 

Ultimately all of the central reserve city banks and the ordi- 
nary reserve city banks will, at frequent intervals, analyze all of the 
out-of-town bank accounts carried with them, and the out-of-town 
banker will be obliged to carry a balance in accurate ratio to the 
service rendered to him. 

Unless he, in turn, passes these increased costs along to his 
customers for whose benefit, largely, he carries these reserve bal- 
ances, with their attendant collection facilities, then he will see his 
own profits dwindle. 

And how is he to intelligently pass on these costs unless he also 
introduces a cost system? 

The practicability of a cost system in a bank has been demon- 
strated in several instances at least, and the only reason these in- 
stances are not more numerous is that few banks have made any ade- 
quate attempt to figure costs at all. 

The economy of a cost system and its profit producing possi- 
bilities are shown by the fact that in the case of one Central Reserve 
City Bank having over a hundred millions of assets, the work is en- 
tirely handled by one man with two clerks, and the permanent an- 
nual gain will amount to $40,000.00 in actual cash profits less only 
the salaries of these three men. And no customer has been offended , 
by a request for an increased balance based on a definite showing 
of the earnings of his account. 

One bank in an ordinary reserve city has, for about five years, 
made a monthly analysis of each of its large accounts, aggregating 
about 80% of its entire volume of business. The net addition to 
profits, resulting from this work the first year was over $9,000.00 
and the last year over $30,000.00. 


At first blush most bankers think of a cost system as necessarily 
attended with a small army of so-called expert accountants, and the 
introduction of a mass of card-indexes akin to the outfit which Mr. 
Hitchcock was reported to have used in the Taft campaign. They 
think it means a mass of intricate detail, a large cost for operation 
and impracticable results at best. 

And this attitude is natural, for the subject is not easy of mas- 
tery, but, on the other hand, it is not as difficult as might at first 

Most of the data needed is already at hand if rightly used. 
It means no disturbance of your present methods, simply a little 
additional work, in the average bank, which can probably be done 
by one of your present bookkeepers when he has mastered the 
methods involved. 

In a bank having assets of a few millions the work could easily 
be handled in a fraction of the time of some one bookkeeper, and 
adjustments resulting in a total increase in commercial balances 
amounting to only $30,000.00 would increase the bank's earnings 
more than his whole salary, to say nothing of other general benefits 
or the cumulative gain in other years. And there are few fair-sized 
banks where the intelligent application of a cost system v^ll not re- 
sult in more than $30,000.00 increase in commercial balances the 
first year it is in operation. 

The objection that it will require some effort and cause some 
expense to do the bookkeeping connected with a cost system is really 
ludicrous when one stops to think of the staggering load of free book- 
keeping that banks are now doing for their customers. 

The sooner the banks begin to do cost accounting for them- 
selves, the sooner they will create conditions where they will receive 
pay for the great amount of free bookkeeping they are now doing 
for others. 

The day is coming, and coming soon, when bankers will real- 
ize, as manufacturers and merchants already do. that the first step 
toward adequate and equitable profits, is a thorough knowledge of 


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costs, when bankers will see that the true remedy for much of the 
extreme and unprofitable competition now in vogue, is in a better 
l^norvledge of costs on the part of all bankers. 

The fact that the system given here, or some modification of it. 
has stood the test of practical application, that it has produced large 
increases in profits, and that it has the hearty approval of men who 
have worked at this problem for years, and the undeniable fact that 
some adequate system of cost accounting in a bank is one of the cer- 
tainties of the immediate future, should commend it to your earnest 



The greatest remedy for excessive 
and unintelligent con\petition is an ac- 
curate knowledge of costs. 

Few combinations or agreements 
have ever been strong enough to restrain 
the competitor who honestly believed he 
could secure more business at a profit 
by offering extra inducements. 

But few men will persistently offer 
their goods or their service for less than 
cost, after they know what the cost is. 



Cost Accounting in A Bank. 

The purpose of a cost system in a bank is to give the manage- 
ment an analysis of total costs and earnings in the commercial and 
savings departments, covering definite periods of time, so that the 
relative efficiency of each department may be compared annually or 
semi-annually, in order that the management may have a true basis 
on which to make efforts for larger earnings and lower expenses. 

Further, to provide a basis for correctly analyzing the earnings, 
cost and profit or loss on any or all individual accounts, to the end 
that such accounts as may not be paying a proper profit may be 
adjusted on an equitable basis. 

The introduction of a cost system does not mean : — 

A material disturbance of your present system of bookkeeping. 

Nor a mass of intricate calculations, or the introduction of an- 
noying red tape. 

Nor unbending rules for dealing with customers. 

Nor any lack of flexibility in policy in handling individual 

What a cost system does mean: — 

It means simply such a possible re-division of the expense ac- 
counts in your general books as may be necessary to properly classify 
and to facilitate the correct distribution of all expenses. 

It means semi-annual or annual summaries of total costs and 
earnings in the savings and commercial departments, prepared in a 
manner to encourage careful comparisons of results in different 
periods and to expose any unnecessary increases in expenses or rea- 
sons for decreases in earnings, so that if possible these weak spots 

may be strengthened. 

(See Specimen Comparative Sheet on pages 36 and 37.) 

It means a system for accurately distributing earnings and costs 
to individual accounts, the tactful presentation of the facts to cus- 
tomers whose checking accounts show a loss or an insufficient profit 
and the adjustment of such accounts on an equitable basis. 





(See Specimen Letter requesting increase in balance, on page 43.) 
It contemplates such analysis of savings accounts as will dem- 
onstrate which classes of accounts are most profitable to the bank, 
and what rate of interest, and what rules as to its computation, will 
produce an equitable total profit. 

General considerations of policy must govern many of the 
transactions of a bank. The introduction of a cost system does not 
mean the elimination of this element, but it does mean that in decid- 
ing upon his policy, in a general way, or in any individual case, the 
banker shall be fortified by an exact knowledge of costs and earn- 
ings, that he shall kr^oTV his facts instead of guessing at them. 

General Considerations in Cost Accounting, 
There are certain methods in cost accounting which make for 
simplicity and accuracy and other methods which are both complex 
and inaccurate. To illustrate. Imagine a manufacturer of clothes 
pins. Suppose the cost accountant figures the cost of the wood in 
one clothes pin, the minutes consumed in each operation on it and all 
the small fractions of various overhead expenses, and his final cost 
is used as a basis for the sale of a billion clothes pins. It will be 
clear that all of his errors or omissions will be multiplied by one 
billion. The smallest error may be enough to break the business. 
But if he should say, "Last year it cost for materials, labor, expenses 
of operation and selling, $75,000.00, and we made a billion clothes 
pins, therefore each clothes pin cost us one-billionth part of 
$75,000.00," he would have a figure he could use confidently. 

The clothes pin maker's troubles have been stated very briefly 
and incompletely, but enough to emphasize the idea, which is that 
general averages are accurate as a rvhole, which is the important 
point, and that where they may fail of perfect application to each 
individual case, they are, in fact, more accurate than minutely car- 
ried out detail figures, with all their possibilities of error. 

Another thing must be borne in mind. No man can tell you 
the exact cost either of running your bank or of any individual ac- 
count tomorroTV. The best he can do is to give you that cost for 
yjesterda^^ as a basis for your work tomorrow. 




There is, therefore, a margin of uncertainty at best, so there 
is little use in wasting time over refinements of detail that are of 
questionable value at best. 

No cost system can be made which can be used without change 
by an^ bank. Conditions vary. A large bank requires a more 
elaborate method than a small one. 

A cost system must be adapted not adopted. 

What each banker needs to know is the cost and the earnings 
in his bank. 

The costs and the earnings of other banks, while of a certain 
value to him, for comparative purposes, and as a check on the effi- 
ciency of his own efforts ; should never be used as a basis for his own 

If there is anything of value to you in this book, it is in the 
application of this method, or some suitable modification of it, to 
}^our bank. 

Bankers differ as to the extent to which cost calculations should 
be elaborated. Some desire the utmost exactness. Others contend 
that it is better to use fairly exact averages, with a liberal margin 
in favor of the bcink to cover possible variations. 

The attempt herein has been to give a system which will give 
results as accurate as can be desired by any banker and to do it with 
the least possible amount of work. 

If any banker, in applying these ideas, desires to eliminate cer- 
tain portions of the work, and is satisfied with less accurate results, 
it is, of course, his privilege to do so. 

In the illustration here given, cost and earning percentages 
have been carried out several decimal places. In practice it would 
be policy to add to the cost percentage and reduce the earning per- 
centage, enough to bring each to an even half or quarter of a per 
cent, as costs and earnings will vary from time to time and the bank 
should have some margin for safety. 

While the figures herein have been prepared with great care 
to represent real conditions, whether they do or not, really has no 
bearing on the value of the method. 




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As far as possible, inconsequent details have been omitted, the 
desire being to concentrate attention on the method and to avoid all 
confusing technicalities. 

As far as possible, general averages should be used in figuring 
costs and earnings in a bank. Loaning rates fluctuate more or less, 
and as a banker does not care to be constantly disturbing his ar- 
rangements with his customers, the basic percentages showing the 
cost rate, earning rate and per-item cost should be based on the 
bank's general average figures for the past year. 

In analyzing individual accounts, the figures for each account 
can be compiled for any period of time that may be convenient, not 
necessarily for a full year. 

A^en; commercial accounts of an^ size, or depositing man^ out- 
of 'town items, should be analyzed at the end of one month or three 
months, so as to immediately re-adjust arrangements rvhich are 
radically inequitable. 

For the purpose of illustrating the application of a cost system 
there are here shown the figures for what we will call the Specimen 
National Bank, not in a reserve city. These are not the figures of 
any actual bank, as I could not properly publish such figures, but 
the figures are based on actual data. That they would exactly rep- 
resent conditions or results in any individual bank is not claimed, 
in fact it should be distinctly understood that their sole purpose here 
is to illustrate a method, not to establish actual or average figures. 

The illustration here used is of a National Bank with a large 
savings department. 

The deposits in the commercial and savings departments will 
look disproportionate to the average national banker, who if he has a 
savings department at all, has a small amount of savings deposits in 
relation to his commercial balances. 

There are three reasons for making this illustration in this way. 
One is that the only actual figures at my command are those of a 
somewhat similar bank, and were I to construct an example with 
a radically different proportion I would have no actual figures by 
which to check the results shown in this illustration. 


Another reason is that these proportions exist in a great many 
state banks and the illustration in this form comes closer to their con- 

A further reason is that I wish to show the profit on savings 
handled in considerable volume, so as to make the figures themselves 
of some value. 

I have made it a National Bank instead of a State Bank so 
as to bring in some elements that could not be shown in a State Bank 
set of figures, such as circulation, government bonds, etc. 

A bank with a trust department would have to make a further 
subdivision of expenses and this is shown beginning on page 38. 

For the purpose, therefore, of illustrating a method of cost ac- 
counting, the following figures are used: 

The Specimen National Bank* not in a reserve city. 



Loans and discounts $3,122,500.00 

Due from reserve banks 320,000.00 

Cash and due from other banks 335,000.00 

Due from U. S. Treas 12,500.00 

Furniture and fixtures 20.000.00 

U. S. bonds 250,000.00 



• Capital $ 250,000.00 

Surplus 50,000.00 

Undivided profits 10,000.00 

Savings deposits 2.000,000.00 

Certificates 350,000.00 

Commercial deposits 1,150,000.00 

Circulation 250,000.00 


U. S. Bonds and circulation are added after totals are struck, 

as these two items offset each other and their totals do not enter into 

cost calculations. 





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This bank pays four per cent on savings, compounded semi- 

Three per cent on six months certificates and four j)er cent on 
one year certificates. 

Interest is paid on certain checking accoimts by special agree- 

For the purpo se of this explanation all the figures above given 

are supposed to represent not only the condition on a certain given 

date, but also the average daily amounts for each item for a period 

of one year. 

In addition to the figures shown in statement, the follow^ing 

general data is used in the computation of costs and earnings. 

Average daily total of all deposits $3,500,000.00 

Reserve required by law. 15% of $3,500,000.00 
(minor details in computation of reserve omitted as 

inconsequential here) 525,000.00 

Average daily amount of assets not loaned 687.500.00 

Excess of fimds not loaned over legal reserve 162.500.00 

Average deuly amount in transit 80,000.00 

Interest Earnings, 

Total interest earned by all loans $1 73.755.00(a) 

Interest earned by balances in reserve banks 4,000.00 

Interest earned by government bonds 5.000.00 

Exchange and sundry earnings 3.000.00 

Total of all earnings $l85,755.00(b) 

(a) equals 5.56A6fr on funds loaned. 

(b) equals 5.3072% on total deposits. 

For accuracy in cost accounting, it is desirable to use the amount 
of interest actually earned in a year, rather than the interest received. 

Exchange earnings are included with the interest earnings as diey 
result partly from the maintenance of balances in other cities, and the 
item as a whole is too small to warrant any individual disposition of it. 

Division of Earnings fcp Departments. 

Savings deposits $2,000,000 

Commercial deposits $1,150,000 

Certificates 350,000 1.500,000 


X $185.755=$106.I45.71 for savings department. 


$1,500,000 ^ $155 755=^$ 79,609.29 for commercial dept. 


On savings accounts.... 

On certificates 

On checking accounts... 

Interest Paid Out, 

Average rates. 
.$70,000.00=3.5%o net on sav. deposits. 
. 12,250.00=3.5% on certificates. 

5.000.00= .004347 average on commercial, 
(really 2% in special cases) 

Detailed Operating Cost. 

The plan here followed is to charge directly to each depart- 
ment all of those specific expenses having to do with the clerical 
work and to charge in general expense all other costs aside from in- 
terest, and then to assess 25% of the general or overhead expense 
against the two departments in proportion to the number of items 
handled by each in a year, the remaining 75% of general expense 
and interest on capital, surplus and profits being finally assessed to 
the individual accounts on the basis of their balances , and the total 
clerical cost including 25% of overhead expense is finally assessed 
to the individual accounts in proportion to the number of items in 
and out on each individual account. 

This plan is based on the idea that the mechanical operation 
of a bank has two main elements of cost, the care and loaning of 
money and the handling of detailed transactions for customers. 

That the detailed cost of handling items should be assessed 
on the per-item basis is manifest and that some share of the over- 
head expense should be included in the calculation of the cost of 
handling items is evident, for rent, heat and light are quite as neces- 
sary to the clerical force working on items as to the officers and 
directors who pass on loans. A certain part of the time of officers 
is given to oversight of those handling items and even to personal 
attention to many individual items. The proportion of general ex- 
pense (25%) charged into the per-item cost is purely arbitrary 
and there is no method of fixing it not open to argument, but this 
proportion has been approved by a number of bankers and can be 
altered, of course, by any banker who may see fit to apply a differ- 
ent rate in his own cost plans. I would not undertake to say that 
either 20% or 30% would be wrong, merely contending that the 


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principle of including some per cent of overhead expense is in line 
with accepted methods of cost accounting in all lines of business and 
that there is no reason for not including it in the case of a bank. 

Subdivision of Operating Expenses. 

Clerical Expense 

Item. Genl. Expense Commercial Savings 

Rent $ 3.000.00 

Fuel and light 550.00 

Taxes 8,230.00 

Express and freight 400.00 

Postage 1 ,000.00 

General stationery 850.00 

Pass books, checks and de- 

posit slips $ 900.00 $ 350.00 

Telegraph and telephone 275.00 


Directors 1 ,000.00 

President 4,000.00 

Vice president 3,000.00 

Cashier 2,500.00 

Asst. cashier and rec. teller... 1,600.00 

Savings teller and bookkeeper | 500 00 

General bookkeeper 1.000.00 300.00 *200*00 

Commercial bookkeeper 1,200.00 

Collection clerk 720.00 

Paying teller 1,200!00 

Stenographer 450.00 150.00 

General clerks 600.00 500.00 100.00 

Porter 600.00 

Miscellaneous expense 3,000.00 

Advertising .-. 3,500.00 

Depreciation on fi x t u r e s 

(10%) 2,000.00 

Attorneys* fees 1 .000.00 

Totals $36,505.00 $ 6.870.00 $2,300.00 

25% of genl. apportioned to 

depts. on basis of items... 9,126.25 8,513.29 612.96 

Net to charge on basis 
of balance $27,378.75 *$15.383.29 *$2.912.96 

*Net to apportion on per-item basis. 

In the above statement, a number of items such as postage, ad- 
vertising and general expense, have been thrown entirely into the general 
expense colunin. a part of each being ultimately distributed to the various 
departments, in a general way. It is, of course, possible to subdivide 
the expenses more accurately and minutely, between the different depart- 
ments, but this is a matter that may easily be carried to extremes. 


This bank is supposed to have arrangements with its reserve 
banks for crediting all items at par. If this bank were obliged to 
pay specific collection charges, these would properly be charged 
direct to the cost of each customer's account in analyzing the same. 

Division of Net General Expense Between Departments 

On Basis of Deposits. 

^^*^^nnn^ ^ $27.378.75=$! 5.645.00 or total general expense to 
$3,500,000 assess to Savings Dept. 

$1,500,000 ^ $27.378.75=$1 1,733.75 or total general expense to 
$3.3UU,UUU assess to Commercial Dept.. including Certificates. 

As the use of the capital, surplus and profits of the bank is a 
cost item and no real profit can exist till after ordinary interest is 
earned on same, and as all the i nterest earnings of the bank have 
been averaged against deposits onl}f to show the average earning 
rate for deposits we must add to the general operating expense an 
amount equal to six per cent on capital, surplus and profits (6% 
of $310,000.00 or $18,600.00), to get the true total cost of doing 

75% of general expense $27,378.75 

6% of capital, surplus and profits 1 8,600.00 

Total general cost of operation $45,978.75 

J. O g r,f\ r\/\r\ nn T^ ^ '^ ^ 367% or average cost of each dollar of deposits 

for general expense and to cover use of capital, surplus and profits. 




\ i 

General Statement of Earnings fcp Departments, treating Certificates 
as a part of the Commercial Department, 


Total interest earnings $79,609.29 

Interest on checking accounts $ 5,000.00 

Interest on certificates 12,250.00 

Proportion of general expense.... 11,733.75 

Detailed operating expense 15,383.29 44,367.04 

Net earnings $35,242.25 


Total interest earnings $106,145.71 

Interest paid out $70,000.00 

Proportion of 

genl. expense 1 5,645.00 

Detailed operat- 
ing expense.... 2,912.96 88.557.96 

Net earnings $ 1 7,587.75 1 7,587.75 

Total net earnings of bank $52,830.00 

6% on capital, surplus and profits 18.600.00 

Actual net profits $34,230.00 

Net earnings equal 17.4% on capital, surplus and profits, or 21.13% 

on capital only. 
Net profits equal 11.4% on capital, surplus and profits, or 13.69% 

on capital only. 

It is interesting to note that although the Savings Department 
has one-third more deposits than the commercial department its 
actual net earnings are less than one-half as much, with an interest 
rate of four per cent on savings. 

Were the use of capital, surplus and profits assessed against 
each department in proportion to the deposits in each, instead of 
against the total net earnings, as here shown, the savings depart- 
taent would show a still less favorable relative profit. 

However, as a comparison between strictly savings and regu- 
lar commercial business, it is only fair to add that losses would be 
very small in a strictly savings bank, while some loss, and often con- 
siderable loss, is unavoidable in commercial banking. 





Computation of total number of items in and out handled in each 

department in a y^ear and the fixing of an average 

per-item cost in each department. 


Number of cash deposits 67,000 

Number of checks and drafts on other cities 175,000 

Number checks on other banks in city 133,000 

Number of certificates written and cashed 2,500 

Number of post-office orders 12.500 

Number of checks drawn on this bank .235.000 

Total items handled in conmiercial dept. in year 625,000 


Number of cash deposits 21,000 

Number of checks and drafts on other cities 2,600 

Number checks on other banks this city 500 

Number of post-office orders 1,900 

Number of withdrawal checks 19,000 

Total items handled in savings dept in year 45,000 

(For practical purposes a count of the total items for an average 
month, multiplied by twelve, would be sufficiently accurate. See re- 
marks on **Counting Items." pages 51 and 52.) 

Total cost of handling items conunercial dept.. $15,383.29 ^ ^^ 

Number of items. 625,000 
$.02461 3 cost per item in commercial department. 

Total cost handling items in savings dept.. $2.912.96 , 

Number of items. 45,000 
$.06473 cost per item in savings department. 

Having now established an average earning rate for each dol- 
lar of deposits, an average percentage to allow for general expense 
and to cover use of capital, surplus and profits, and having estab- 
lished a per-item cost in both commercial and savings departments, 
and knowing the rate of interest paid on savings accounts and 
certificates, and the specific interest credited to certain checking 
accounts; we have basic percentages from which the earnings and 
cost of any savings or commercial account or certificate can be 


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quickly and easily computed. As these elements cover all items of 
cost, were we to analyze every account in the bank and compile the 
profit or loss on each we would get a total corresponding to the 
total net profit as shown by the general books, this being the princi- 
pal test for proving the correctness of a cost system. 

Specimen Analysis of a Commercial Account Having an Average 

Bail}) Balance of $2,000.00 and a Total of 1 .000 

Items in and out in a Year. 

5.3072% (average earning rate on deposits) 

times $2,000.00. equals total earnings of $106.14 

1.31367% (average cost on basis of balance) 

times $2,000.00, equals $26.27 

1000 items at $.024613. equal 24.61 - - 50.88 

Net annual profit on account $ 55.26 

which equals .02763% on average balance. 
No interest paid on this account. 

Specimen Analy^sis of a Commercial Account Which Barely Pays 

Its Cost, Average Daily Balance, $300.00. Total 

Number of Items in and out in a Year, 486. 

5.3072% (average earning rate on deposits) 

times $300.00 equals total earnings of $15.92 

1.31367% (average cost on basis of balance) 

times $300.00 equals $ 3.94 

486 items at $.024613 equal 11.98 15. 92 

Account just breaks even $00.00 

From tfie above it will be clear that no fixed balance can be set 
as representing the line between profit and loss, as the number of items is 
fully as vital a feature as is the balance. An account with an average 
balance of $100.00 would break even, provided the number of items 
did not exceed 1 62 in a year. 


Specimen Analysis of a Savings Account Having an Average 
Balance of $500.00 and 12 Items in and out in a Year, 

5.3072% (average earning rate on deposits) 

times $500.00 equals total earnings of $ 26.54 

3.5% (average rate of interest paid on savings) 

times $500.00. equals $17.50 

1.31367% (average cost on basis of balance) 

times $500.00, equals 6.57 

12 items at $.06473, equal .78 24.85 

Net annual profit on account $ 1.69 

which equals .00338% on average balance. 

It will be well, at this point, to bear carefully in mind the fact 
that while commercial accounts are analyzed for the purpose of 
adjusting individual accounts; savings accounts are analyzed for the 
purpose of determining whether the rate paid and the rules and con- 
ditions, as a whole, are such as to show a proper profit to the bank 
on all classes of accounts, and if not. to so modify those general con- 
ditions, as to all customers, as to put the savings department on a 
sound basis. 

It will be noted that in the account analyzed above, we have 
used the average rate paid on savings, instead of the actual interest 
paid on this particular account. This form of analysis is of interest 
as showing average results, and it is the only form of analysis that 
could be used for estimating the probable future profit of an account, 
inasmuch as it cannot be told in advance whether the depositor will 
so deposit and withdraw as to forfeit part or all of his interest, or so 
as to obtain the full rate of four per cent. 

We would, however, fall far short of obtaining all the informa- 
tion we should have if we failed to consider what various classes of 
individual accounts may earn and do earn under the varying con- 
ditions which depositors, under the rules, create for themselves. 

The following figures will be valuable for a further considera- 
tion of the matter. TTiese figures of course aipply to the Specimen 

National Bank- 


• "^t^^y*."***- 

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Average earning rate on deposits 5.3072 % 

Average cost rate on basis of balance ..1.31367 % 

Average net earning rate of deposits on basis of balance 3.99353 % 

Average rate to cover cost of handling items in savings depart- 
ment ($2.9 1 2.96-^$2.000.000=.00 1 456% ) .001456% 

Average net earning rate of all savings balances 3.992074% 

Averate rate of interest paid on all savings deposits .3.5 % 

Average net margin of profit on all savings deposits 492074% 

However, this last figure is the average rate of profit, based on 
the average rate paid OYiVc) and with the item cost averaged on 
the basis of balance. 

Individual accounts may show wide variations from this result. 

A depositor who so deposited and withdrew as to forfeit all 
interest would produce a profit 3 J/2% greater. 

And a depositor who maintained a permanent, undisturbed 
balance would receive the full four per cent., whereas his account, 
ii charged with its full share of expense, would earn, net, but 

While the rate that any individual bank can afford to pay on 
savings is determined largely by its own average loaning rate and 
by its volume of business and cost rate for handling money, and 
while the rate which it must pay may be determined, to some extent, 
by competition, nevertheless certain valuable deductions can be 
drawn from the above figures, as to the Specimen National Bank 
or any other bank operating under similar conditions, and many of 
these deductions will apply in a relative way to any bank. 

These conclusions are ; 

TTiat the average hank can pay four per cent, on savings and 
make a profit on the business as a rvhole, but that this profit is not 
commensurate with the profit on commercial business carried on 
under the same general conditions, nor consistent with the capital 
and ability required. This will be clear if we take the net earnings 
of the savings department in the Specimen National, $17,587.75, 



and deduct interest on that portion of the capital, surplus and profits 
which would be properly assessed to the savings department, viz: 
$10,628.57, as this would leave an actual, net, annual profit of but 
$6,959.18 (in excess of 6% on capital, surplus and profits), on a 
savings business aggregating two millions. This sum is manifestly 
inadequate to the creation of a proper surplus, meeting possible 
losses and producing any clear profit for the stockholders. 

That permanent accounts in such a bank produce a small but 
continuous loss. 

That the profit made on the business as a whole, comes entirely 
from the factor of the forfeiture of interest by a part of the depositors. 

That in such a bank, the granting of rules or special concessions 
that tend to reduce or eliminate the forfeiture of interest, will operate 
to bring the whole business nearer and nearer to the point where it 
will not pay. 

That the average cost of handling items in the savings depart- 
ment is high and if a depositor is permitted to use his savings account 
as a checking account, all possible profit will be destroyed, particu- 
larly if the rules as to withdrawals result in his receiving interest on 
his balance. 

That in any savings bank the most profitable accounts are the 
large ones which are just sufficiently active to develop strongly the 
factor of forfeited interest. 

That small accounts are of value only for the future there may 
be in part of them and for the friendly influence of their owners. 

The percentage of loss on permanent accounts here shorvn 
(.00647%) is very small and the elimination of such accounts would 
he undesirable, as the}) are carrying an amount of general expense 
(1.31 367% ) which is far greater than the net loss they cause, and if 
they were eliminated, this amount of expense would revert to the 
remaining business. 

There can be no question but that, in the average bank, a rate 
lower than four per cent., with more equitable rules, so planned ais 






to produce only a nominal forfeiture of interest, would be fairer to 
customers as a whole, and help the bank by producing a more evenly 
balanced profit on all classes of accounts and a greater total profit. 

Certificates, likewise, are analyzed, not for the purpose of 
changing the conditions of any particular certificate, but to determine 
whether the rates paid and the terms granted on all certificates are 
equitable and profitable. 

In analyzing a certificate, the rate actually paid on that partic- 
ular certificate should be used. The securing of the average rate 
paid on all certificates, when they are issued at more than one rate, 
is simply for comparative purposes. 

In the Specimen National, three per cent, certificates would 
show a profit, while four per cent, certificates would be in the same 
class with permanent savings accounts and would show a small loss. 

In analyzing certificates, two items should be figured in the cost, 
covering the writing and the cashing of the certificate. 

The results above shown are those that would be accomplished 
in a bank having Ae same conditions in every way as our Specimen 
National Bank- These results would naturally vary in different 
banks, according to their expenses, the rate paid on savings, and the 
rate earned on funds loaned, etc. 

This completes the system for a bank in a city not a reserve city, 
a nd in which there are no accounts having an abnormal quantity of 
out-of-towns items deposited. 

It consists briefly of a logical method of distributing the earn- 
ings and costs of the bank to the individual accounts by means of 
certain basic averages. Different men will have somewhat different 
ideas as to the distribution of certain expense items, whether cer- 
tain items shall be charged on a balance basis or a per-item basis, 
and the division of clerical salaries between the different depart- 
ments naturally would be laid out according to the work done by 
various employees in each bank, — but this system apportions ever^ 
dollar of expense to customer's accounts, and this is the important 


point. Whether some certain expense is included in the balance 
cost or in the per-item cost would at most make very little difference 
in the cost of any individual account and no difference at all on the 
aggregate cost of all accounts. 

Some bankers assess all costs on the basis of balance, contending 
that obtaining and applying a per-item cost involves too much work. 
They treat the handling of items as an incidental matter of small cost 
and not worthy of separate accounting. A careful consideration of the 
above analysis, however, shows that the per-item cost in an average 

bank really is a considerable portion of the operating cost, and no truly 
correct analysis of accounts in the average bank can be made without 
figuring a proper p)ortion of cost on die per-item basis. If all costs are 
assessed on a balance basis an undisturbed balance of $100 would 
show exactly the same cost as an account having an average balance of 
$100 and any number of items in and out — a manifest inconsistency. 
The very purpose of an analysis is to show whether the balance is in 
proportion to the cost of handling the account and this purpose is de- 
feated by throwing the item cost in with the balance cost Tlie total 
number of items handled by the bank can usually be easily told from 
present records and the number of items per account would not be com- 
piled all the time for all accounts, but simply for a period of one month 
on such accounts as were analyzed. (See page 51.) 

So far in this discussion there has been no attempt to figure the 
cost of collections* individually, the cost being covered as an average 
and going to reduce the average earning of deposits. The specific 
costs of collection by banks not in central reserve cities are almost 
entirely passed on to their correspondent banks in the central re- 
serve cities and paid for indirectly by leaving low-interest-earning 
balances in those banks. As the total amount of interest earned 
has been used in figuring the percentage earned by deposits it fol- 
lows that the rate thus established automatically takes care of the 
cost of collection, as it allows for all idle funds, and for reserve 
funds earning a low rate of interest. 

*In this book the word "Collections** is used in the broad sense, 
meaning all out-of-town items. 



But it is particularly noted that this feature of the cost of col- 
lection is thus made a uniform or average charge against accounts 
on the basis of their balances, and while it would be so nearly equit- 
able in a bank where the checking accounts each have about the same 
relative amount of foreign items in proportion to local items, that it 
would not be policy to enter into elaborate calculations on this mat- 
ter, still in a bank having some customers whose collection work is 
abnormal, or in a reserve city bank, this feature must be handled 

However, in the average, moderate-sized bank, the system of 
averages outlined above is entirely accurate as to general results and 
it is most easily applied to the average run of accounts even though 
the alternate system that follows be applied to exceptional accounts. 
Technically speaking, it does not properly discriminate between the 
customer who deposits local items and the one who deposits foreign 
items, charging each with a uniform cost rate, but the inequity in 
moderate-sized accounts would be very small and not sufficient 
to warrant the application to them of the more elaborate system 
required in the analysis of very large commercial accounts with 
abnormal collection features, the accounts of other banks, or in 
the cost accounting of a reserve city bank. 

We will now consider those further methods necessary to 
properly handle these more complex conditions. 

In the first place the figuring of costs will be unchanged from 
the method shown above, except that in a central reserve bank, spe- 
cific collection charges will be charged to the cost of the individual 
account, and the percentage to cover cost assessed on a balance basis 
will be calculated in a little different manner. 

The necessary differences in method of computation, with these 
exceptions, come in the figuring of earnings. 

The explanation of how to handle an occasional abnormal 
account in the Specimen National, will be clearer if we first take up 
the computation as it would be made for accounts carried in Central 
Reserve City Banks. 


In a Central Reserve City Bank. 

Operating expenses would be distributed in the same manner 
as already outlined, viz. : on the basis of balance cost and a per- 
item cost. But specific collection costs will be charged direct to the 
cost of each account. 

Earnings would be figured by first deducting from the apparent 
balance, the average daily amount in transit, by a method of figur- 
ing given in detail as a foot note on page 5 1 . 

From this true balance would be deducted the legal reserve 
of 25% to give the net actual usable balance. 

The reason for deducting the reserve in detail instead of aver- 
aging this shrinkage into the earning rate on the balance, is that in 
a central reserve bank the reserve is large and it is an item of cost 
that will not be questioned by customers to whom an analysis of 
their accounts may be submitted, whereas were it averaged into the 
earning rate they might question that rate, not knowing how it was 


It will be clear, however, that even after deducting the average 
amount in transit and the 25% legal reserve, from the total apparent 
deposits, the remaining actual balance, while "usable." is not 
actually all used, as a central reserve city bank must keep some 
money, at least, on deposit with other banks, and some of its cash 
funds are not legal for reserve. 

Hence they cannot, with fairness to themselves, credit the cus- 
tomer with the average loaning rate on his actual usable balance, 
nor can the customer expect this, as the 25% legal reserve is a min- 
imum, not a practical line of division between idle and working 


Hence they must establish an earning rate for actual usable 

balances and this would be figured in this way : Average daily total 

deposits as per books, less total average amount in transit daily, less 

25% for legal reserve, divided into total interest earnings for year, 

equals average rate of earnings on actual usable balances. 


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The percentage to cover the general cost of doing business 
should also be computed on and assessed to the individual accounts 
on the same basis, that is, on the basis of usable balances. 

An analysis of an account in a central reserve city bank, 
handled on the basis of crediting all items at par on day received, 
and paying 2% interest on true balance, that is the balance after 
deducting items in transit only; would appear as follows: 

Apparent average daily balance $100,000.00 

Less average daily amount in transit 10,000.00 

True total average balance $ 90,000.00 

Less 25% for legal reserve 22.500.00 

Actual usable balance $ 67,500.00 

4. 75% (average rate earned on actual usable balances) 

times $67,500.00, equals $ 3,206.25 

.75% (percentage for balance cost) 

times $67,500.00, equals $ 506.25 

25,000 items at $.015, equal 375.00 

Specific collection charges 125.00 

Interest on $90,000.00 at 2% 1.800.00 2.806.25 

Net annual profit on account $ 400.00 

which equals .004% on apparent average balance. 

The earning and cost percentages and per-item cost here given for 
a central reserve city bank are purely imaginary and inserted to illus- 
trate the method. 

Notice Carefully, 

Some bankers in ordinary reserve cities and in central reserve cities, 
while admitting the necessity and practicability of a per-item cost in the 
average run of banks, contend that in large reserve banks, this feature 
would entail a prohibitive amount of work and that it is not necessary 
for several reasons. First, because in a very large bank the salaries of 
executive officers amount to so much larger relative proportion of the 
whole salary list and that clerical expense as a whole is such a relatively^ 
small part of their total operating expense, that its separate accoimting 
is not worth while, and that it is approximately correct and better prac- 
tice to assess all costs, except as shown above, on the basis of the bal- 
ance. The fact that the central reserve bank deducts time in transit 
and collection charges specifically, and inasmuch as their business with 
other bankers probably follows more nearly an average condition as to 
the ratio between balance and per-item cost, doubtless justifies their 



Li A 

opinion, though I believe their conclusion is based on sound appearing 
theory rather than on the basis of actual figures made in both ways. This 
is one of those fine points that die individual banker must settle for 
himself. (See additional remarks on this subject on page 51.) 

The foot note explaining the method of computing the average 
daily amount in transit completes the explanation as to a central 
reserve city bank. (Page 51.) 

In an Ordinary Reserve City Bank. 

This method with some manifest modifications as to the matter 
of reserve would also apply to a bank in a reserve city but not in a 
central reserve city. 

As banks in ordinary reserve cities collect some items direct 
and some through their central reserve city connections, it follows 
that the calculation of a customer's actual average amount in transit 
is difficult. In one city a clearing house rule fixes a certain average 
time in transit which average is used arbitrarily, but as it is based 
largely on the time in transit to central reserve points merel}? and 
does not include the additional time in transit absorbed by the cen- 
tral reserve city banks and paid for by means of low-interest-bear- 
ing balances, there is a manifest inequity against the banks in an 
ordinary reserve city and in favor of their customers, I believe that 
the bank in an ordinary reserve city should figure its accounts in 
much the same manner as is given herein for the use of the Specimen 
National in analyzing special accounts, computing time in transit on 
the basis of direct collection . 

As the amount of funds in transit varies greatly in different ac- 
counts, and as it is such a large factor in cost, the use of an average, 
even if it were a correct average, would manifestly be extremely in- 
equitable as to individual large accounts in banks in reserve or central 
reserve cities. 

In making analyses of individual accounts, the bank in an ordi- 
nary reserve city, will doubtless desire to deduct the reserve spe- 
cifically, as does the bank in a central reserve city, inasmuch as this 










is a large and indisputable item of cost, but if this plan is followed 
then the interest earned by a part of their reserve must be included 
in total interest earnings when computing the average earning rate of 
usable balances. 

This plan of deducting reserve specifically, in an ordinary re- 
serve city bank, however desirable in practice, has a certain element 
of inaccuracy, inasmuch as a part of such a bank's in-transit items 
can be counted as reserve. Consequently, if the individual customer 
is charged with his total in-transit and with the full reserve, he is be- 
ing given no credit for the fact that some portion of his in-transit 
items is countable as reserve. And it would be impractical to de- 
termine the amount of this. However, this discrepancy is in favor 
of the bank and may perhaps be looked upon as only a proper mar- 
gin of safety. 

Method for Analyzing Special Accounts in 
The Specimen National Bank. 

Now if the Specimen National wishes to figure the account of 
any individual customer so as to calculate the actual cost of collec- 
tions on that account, it can adopt the central reserve bank's method 
as to any one or more accounts, without affecting the correctness 
of the general method as to the ordinary run of accounts, but as to 
these accounts, figured approximately by the reserve city bank's 
tnethod, certain points must be carefully borne in mind. 

A new average earning rate must be obtained and this rate 
must be calculated in much the same manner as the central bank's 

And here arises a point that is likely to cause confusion. Our 
figures show that the Specimen National has a daily average of 
$80,000 in transit, but this does not give a correct basis to work 
from if we are to deduct from the customer's balance the entire true 
amount of his balance in transit. In other words we must figure our 
general percentages on the same basis that we are going to figure his 




Assuming that if the Specimen National itself performed the 
duties it pays its reserve bank to do for it, and collected direct, and 
that then its average time in transit would be 3J/^ days, under these 
conditions the Specimen National's total in transit would be 3|/2 
times $80,000.00 or $280,000.00, and its earning rate on actual 
balances would then be figured thus : 

Total deposits $3,500,000.00 

Less amount in transit 280.000.00 

Total of net actual balances $3,220,000.00 

Interest earnings. $185755.00 _. -,Q-^, , , 

$3,220,000.00~^*^^,^7' T '"™^f« 7^*^ ^^ "^ 

dollai or actual balance. 

This rate allows for that portion of reserve not covered by all 
or some part of amount in transit, it allows for interest earnings on a 
part of reserve and is the true net earning rate on all deposits after 
deducting the amount in transit, as it would he if all items were col- 
lected direct. 

Except in a central reserve city bank it is not equitable to de- 
duct reserve specifically from each account inasmuch as, in the case 
of a bank not in a central reserve city, items in transit to approved 
reserve agents are counted as a part of reserve. 

Another reason is that the Central Bank's reserve earns noth- 
ing and hence it is proper to deduct it entirely from the customer's 
account before figuring the earning poiver of that account, but the 
other banks receive interest on part of their reserve, therefore in 
such banks the only fair way is to include reserve earnings as a part 
of interest earnings and to average total earnings against total de- 
posits, thereby including in the resulting rate a due allowance both 
for the interest loss and the interest gain by reason of reserve re- 

We must now also establish a new percentage for balance cost, 
as earnings and cost must both be figured on the same basis, thus: 

Total balance cost, $45,978 .75 ^^^„ 

Total actual balances. $3,220,000.00 ^'•"^^^^^^ °' *^"'^«' ^"^'^'' 

cost of each dollar of actual balance. 


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A specimen account would then be figured in this way: 

Apparent average daily balance...^ $50,000.00 

^Average daily amount in transit (basis of direct collection) 1 0.000.00 

Actual balance $40.000.00 

5.7687% (earning rate on actual balances) 

times $40,000.00 equals total earnings of $ 2.307.48 

1.4278'/, (balance cost on actual balances) 

times $40,000.00 equals $571.12 

25.000 items at $.024613 615.33 

Interest at 2% on $40,000.00 equals 800.00 

Estimated specific collection charges 100.00 2,086.45 

Net annual profit on account $ 221.03 

The figuring of actual collection costs is more difficult in a 
bank not in a central reserve city than it is for the central bank, at 
least the establishing of the proper percentages seems more complex. 
The difficulty arises from the fact that the time in transit is largely 
absorbed by the central bank, and its compensation being in the 
form of a semi-idle balance, the problem of distributing this cost to 
the customers of the out-of-town bank is a hard one at first glance, 
but it is believed that the method outlined above arrives at results 
that are as near absolute cost as can be hoped for. 

Nearly every bank has a few accounts depositing an abnormal 
number of out-of-town items, and they are often losing accounts. 
Their balances look good on the face of the books, but on a true 
analysis a positive loss is shown. What difficulty there may be in 
correctly analyzing such accounts will well repay the effort if suit- 
able balances are secured. Every account that causes a loss uses 
up the earnings on that much profitable business. 

It might be thought that as the Specimen National gets credit 
on the next day for all items sent to its reserve bank, that its customer 
w4io deposits any quantity of outside items is entitled to have the 
earnings (not the interest paid to him) of his balance figured from 
that day, but this overlooks the semi-idle balance which the Speci- 
men National is carrying with its reserve bank as compensation for 
such service, and as the reserve bank determines the amount of that 
*See Fool Note on page 5 1 for method of computation. 


balance by figuring the time in transit of outside items, there is 
only one proper way and that is to figure the full time for direct 
collection against the customer and to adjust the other percentages 
so as to be consistent with this method. 

It is sometimes stated that it is not fair to charge to the cus- 
tomer the loss of interest on funds in reserve banks, because the law 
requires a reserve, but as a matter of fact were there no such law, 
most banks would have to keep about this amount of reserve in 
order to properly handle their business, but even were the reserve 
of no use except to satisfy the law, its cost, being unavoidable, is 
properly charged to the customer. 

In fact, all costs in an efficiently conducted business of any 
kind are properly passed on to the customer. Only costs arising 
from poor management or defective facilities should be absorbed by 
the institution itself. 

The item of losses has not been considered in this system of 
cost accounting as losses in the banking business are so variable that 
no fixed percentage could be allowed for them. It is manifest that 
an amount of profit must be sought which will be sufficient to provide 
for moderate losses, and immoderate losses cannot equitably be 
passed on to the customer. 

















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p0l»^g^*iH^>i0^f>lUfiSftl:ir>^. <«^ntM«Qt|ISiK>.W>A«(l«Wlc«- J 

G)st Accounting in a Trust G)mpany. 

General Subdivision of Earnings and Costs in an Average Trust 
Company) Doing a Combination Trust, Savings, Com- 
mercial, Bond and Safe Deposit Business, 

Financial Statement of the Average Trust Co. 


Loans and discounts $1,845,000.00 

Bonds 535.000.00 

Cash on hand and in banks 394,000.00 

Furniture and fixtures 15,000.00 

Vault and safe deposit boxes 5.000.00 


Capital and surplus $ 300,000.00 

Undivided profits 69,000.00 

Commercial deposits 567.210.00 

Deposits from other banks 375.890.00 

Certificates of deposit 196,900.00 

Savings deposits 1,240,000.00 

Trust deposits 45,000.00 

Above figures represent daily averages for a period of one year. 

Statement of Cross Earnings, 

General Interest Earnings. 

Interest from loans and discounts $ 97.400.00 

Interest from banks 5.580.00 

Interest from bonds 22.410.00 

Exchange earnings 610.00 $126,000.00 

Less proportion earned by trust deposits 2,338.14 

Net interest earned by com. and sav. depts $123,661.86 

Trust Department. 

General trust earnings, fees, etc $6,530.00 

Interest earned by trust deposits 2.338.14 

Total earnings from trust department..$8,868. 1 4 8,868. 1 4 

Forward, $132,530.00 

Forwarded, $132,530.00 
Safe Deposit Department. 
Total box rentals and storage charges 2.200.00 

Bond Department. 

Total earnings of bond department 7,600.00 

Grand total of all earnings $142,330.00 

(Distribution of general expense to trust, safe deposit and bond 
departments, shown on line marked "A" on page 40. is based on the 
proportion of earnings made by each department as shown above.) 

Summar"^ of Deposits. 

Conmiercial deposits $ 567,210.00 

Deposits of other banks 375.890.00 

Certificates of deposit 196.900.00 

Total for commercial department..$ 1,1 40,000.00 
Savings deposits 1 ,240.000.00 

Total commercial and savings $2,380,000.00 

Trust deposits 45.000.00 

Grand total $2,425,000.00 

Division of Interest Earnings Between Commercial, Savings and 
Trust Departments, on Basis of Total Deposits 
in Each Department. 




X $126.000.00=$59,233.00 for commercial dept. 
X $126.000.00=$64,428.86 for savings dept. 

X $126,000.00=$ 2,338.14 for trust dept. 

Interest Paid Out. 

Interest paid to other banks $ 9,514.00 

Interest paid on commercial accounts 10,538.00 

Interest paid on certificates 7,226.00 

Total interest paid in commercial dept..$2 7.2 78.00 $27,278.00 

Interest paid on savings accounts 39.405.00 

Interest paid on trust deposits 868.00 

Grand total interest paid out $67,551.00 


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Division of Net General Expense Between Savings and Connmercial 
Departments on the Basis of Total Deposits in 

Each Department. 


X $18.807.33=$9.798.78 for savings dept 
X $18,807.33=$9.008.55 for commercial dept 

General Summary} of Net Earnings tp Departments, 






Commercial Department, 

Interest earnings 

Interest paid out 

General expense 

Detailed operating cost 

Net earnings 

Savings Department, 

Interest earnings $64,428.86 

Interest paid out $39,405.00 

General expense 9.798.78 

Detailed operating cost 1,632.35 50,836.13 

Net earnings $13,592.73 

Trust Department, 

Trust earnings, fees, etc $ 6,530.00 

Int. earned by trust depos 2,338.14 $ 8,868.14 

Expense trust department $ 4.898.30 

Int paid on trust deposits.... 868.00 5,766.30 

Net earnings $ 3,101.84 $ 3,101.84 


Total earnings ... 
Total expenses .... 

Net earnings 

Bond Department, 

$ 7.600.00 


..$ 2.812.86 $ 2.812.86 

Safe Deposit Department, 

Total rentals and storage charges $ 2,200.00 

Total expenses 2,018.12 

Net earnings $ 181.88 

Grand total of net earnings 

Less 6% on capital, surplus and profits 

Final net profits in excess of 6% on investment 


$ 181.88 

... 20.940.00 



;»»«:^>«.»**t-. , 


h » 


Average Interest Rates Earned and Paid. 

Average rate earned on total funds loaned and invested 5. 1 958% 

Average rate earned by bonds 4.188 % 

Average rate earned by loans and discounts 5.279 % 

Average rate paid on savings 3.177 % 

Average rate paid on bank deposits 2.53 % 

Average rate paid on all commercial deposits 1.857 % 

Average rate paid on trust deposits 1.93 % 

(In figuring interest on capital, surplus and profits, the $20,000.00 
invested in fixtures and vault is first deducted, as interest on these items 
has already been figured in the costs.) 

It will be noted that the profits in the conunercial department are 
much lower relatively, than in the case of the Specimen National Bank, 
the reason being that a Trust Company pays interest on commercial bal- 
ances to a much greater extent than a National bank. 

The analysis of individual accounts would be based on above 
data and handled in the same manner as in the calculations for the 
Specimen National Banl^. 

Details already shown in the explanation of the Specimen Na- 
tional Bank*s business, are omitted here, the purpose here being sim- 
ply to show those elements in which a Trust Company's cost ac- 
counting would vary from that of other banks. 

There is a great variation in the amount of trust business 
handled by banks having trust departments, or those known as trust 
companies and having banking departments. I have endeavored 
to show conditions as they are in an average institution doing a com- 
bination trust and banking business. 

TTie individual Trust Company will, of course, need to adapt 
the plan to its own conditions. 


Utilizing the Results. 


In applying the results secured by the analysis of costs, in a 
general way, the comparative sheet showing costs, expenses and 
earnings by departments, as shown on pages 36 and 37, will be of 
the utmost value to the officers and directors. 

A study of such a comparative sheet will quickly locate the 
specific cause of an increase in expenses or a decrease in earnings. 

In utilizing the analyses of individual accounts, tact and dis- 
cretion must be used. 

It is not to be inferred that the purpose of cost accounting is to 
immediately throw out every account that does not pay. 

Its first and greatest purpose is to l^norv the facts, so as to have a 
definite, clean-cut basis on which to approach customers in a really 
intelligent way, in case their accounts require it. 

Your first attention will naturally be directed to your larger 
accounts, especially those depositing a great many out-of-town items. 

Here is a form of letter that might be used in the case of a 
bank customer, which will indicate the manner of hsmdling such cor- 
respondence. The vital point is to be able to show die customer 
exactly what his account earns and what it costs you to handle it, 
so that his sense of fairness may be appealed to. Then the letter 
must be worded in a manner that cannot give offense. That such 
letters will secure increased balances has been proven over and over 

(Letter asking for increase in balance) 

Mr President, 


My Dear Sir — In looking over the reports of our Analysis De- 
partment, I find that the volume of your out-of-town business has shown 
a progressive increase for some months past, and while I am indeed 


"-*!H"=i*-»g»>i«;t»W ^ i,.)4'«uii>jiSj » ij<j J i. 

pleased to note this evidence of your increasing business, I feel obliged 
to call your attention to the bearing this has on the arrangement now in 
force with your bank. 

The enclosed analysis of your account for the past three months 
diows that the cost to us of handling your growing out-of-town business 
has reached a figure which makes the balance originally agreed upon, 
entirely inadequate to meet the present conditions. 

I assure you that we keenly appreciate your business, the more 
so because of the many years of cordizd relations that we have enjoyed 
with you, but I believe, in view of the increased cost of handling your 
account, that an increase of $75,000.00 in the net average daily balance 
of your account is necessary in order to put it on a mutually equitable 
basis, and trust that you will agree with me as to the fairness of this 

Thanking you in advance for your consideration, and awaiting 
an expression of your views in the matter, I am, with kind regards. 

Very truly yours, 

Pres. The Bank. 

In the case of a local customer, it is desirable for some princi- 
pal officer of the bank to take the matter in charge, preferably the 
officer best acquainted with the customer. Here also the advantaige 
of submitting an exact statement is manifest. If the customer is not 
convinced of the fairness of the request, his inclination may be to go 
to some other bank. But with a correct analysis showing exactly 
what his account costs and earns, and if approached diplomatically, 
his pride will be appealed to and he will see that an}f bank would be 
justified in making the same request of him. He will not desire his 
account to be looked upon as undesirable, wherever placed, and will 
willingly increase his balance or make any other equitable arrange- 
ment for giving proper recompense to his bank. 

A director in one bank voluntarily increased his balance after 
looking over the monthly analyses of all large accounts in the bank, 
among which his own had been diplomatically included. 

In the case of small accounts, there is but one really proper so- 
lution. All commercial accounts carrying balances below the profit 







line should be charged a certain fee per month for the handling of 
the account. This is already done in some banks in certain quarters 
of New York City, but its extension to the country at large will 
doubtless be long in coming, for it involves the education of the pub- 
lic and even of many bankers, to the justice of such action. 

Temporarily, many small accounts will be carried at a loss, 
for the sake of the good accounts that may be developed from them. 

It is not impossible, however, to weed out some of the most un- 
desirable ones and to adopt a policy of selection in the taking on of 
new business of this character. 

A bunch of small accounts, even in the aggregate, represent a 
small tax on the bank, and this may be offset by their good will and 
future possibilities. 

If, on careful analysis, all your large accounts show a profit, 
you can wait with some patience for the day when a fee can be 
charged for the clerical work of handling small accounts. 

Cost analysis finds its greatest rewards among the large ac- 
counts with fteavp deposits of out-of-town items. 

In a country bank, any effort to secure larger balances from 
farmers and even from many, sn^all sto>eteopers,, ):y means of an 
analysis of their accounts, would be foredoomed to failure. The 
farmer's attitude of mind tOA'avd a bc^ik and his preconceived ideas 
would put it entirely out of the question. 

The country banker properly solicits mucli business that he 
knows will not pay strictly on its own merits. 

But he wants the financial life of the community to flow 
through his bank. He wants the influence and the friendship of 
every man in the community, and he does this free work to get it. 
It is part of his advertising bill. In many places it forestalls com- 

But the country banker needs to understand costs. 

He should be able to judge the fairness of the balances that 
may be requested from him by his depositary banks in the cities. 


He perhaps has the account of some outside company doing a 
considerable business in his town in the purchase of wool, cotton, 
grain, potatoes or timber. 

And perhaps the money is checked out by the local agent about 
as fast as it is deposited. 

This will be a good instance in which to submit an analysis 
showing cost and lack of earnings and to request either a larger 
balance or a charge based on the volume of business handled for 

TTie local agent receives compensation for his own work and 
understands the convenience and value of the service the bank 
renders, and he will usually co-operate willingly in securing the 
necessary arrangement with the firm he represents. 

In one country bank, three or four such adjustments have 
netted the bank over $ 1 00.00 a year in increased exchange charges. 

There is no reason whatever why the country bank should pay 
express charges on currency shipped in and lose interest on the 
money while in transit, for the purpose of cashing checks for some 
outside concern which carries only an infinitesimal balance. 

In a savings bank^ cost analyses, gives a definite basis from 
which to determine, vyhat rate.of. int^e^t^ and what rules as to the 
computation of same, are most equitable to the bank and to its cus- 
tomers. This njatter hai^ already i>een quite thoroughly covered, be- 
ginning on page 23. 


The Analysis of Advertising Methods in a Bank. 


The tendency in all business is toward more careful analysis 
of conditions, to the elimination of misdirected energy and to the in- 
telligent and systematic use of every legitimate means of increasing 
business profits. 

Tlie cost of getting business and of doing business is being 
studied searchingly that both may be lowered and that profits may 
be increased through the adoption of a policy that pushes those 
features naturally most profitable, and that eliminates or changes 
those features, existing in almost every business, which lose money 
and therefore lessen the gain on the profitable lines. 

Many pages could be filled with true stories of manufacturing 
successes built out of failures, of costs reduced, wages increased, 
working hours shortened, products improved, — all by the introduc- 
tion of scientific business methods. 

Salesmanship is being studied as a science and every aid to the 
economical securing of business is being employed with an intelli- 
gence undreamed of a decade ago. 

The lowering of costs resulting from increased volume of busi- 
ness is keenly appreciated and it is fully realized that every dollar 
of new business pays a double profit, first its own natural profit and 
second the added profit it creates by lifting from the business already 
acquired, a certain portion of overhead expense. 

This is as true in a banl^ as in a factory. A considerable pro- 
portion of expense is fixed. The ratio it bears to earnings and the 
consequent rate of profit depends largely on the volume of business 

A twenty-five per cent, increase in volume of business, increases 
profits far more than twenty-five per cent., by reducing the ratio of 
general expenses on the whole volume of business done. 


! I 

In planning to increase the business of a bank, the same as in a 
factory, the first question is, what class of business to strive to in- 
crease, in other words, what is the most profitable class of business 

Hence, it follows that the subject of costs is intimately asso- 
ciated with any truly intelligent plan for increasing deposits. 

The question of costs enters in many ways : for instance, it costs 
less to keep an old customer than to get a new one, therefore plans for 
increasing business if as broad as they should be, include plans for 
retaining old customers, for preventing needless withdrawals from 
savings accounts, for fostering the interest and the loyalty to the in- 
stitution of so-called established trade. 

The term advertising was formerly and is today, in most cases, 
taken to mean a standing card in the papers and a little spasmodic 
work by mail, with no definite aim and based on no careful analysis 
of conditions, and done purely on theory. 

The results of such poorly applied effort are naturally small 
and have led to the conclusion on the part of many that advertising 
is a gamble. 

As a matter of fact, advertising is a mighty force. While it has 
built many fortunes, its real power, when intelligentl}) directed^ is 
only just beginning to be fully understood. 

The percentage of waste effort has been tremendous. That, 
with all this waste, there has still been a large profit to many adver- 
tisers, is proof that advertising holds a latent power which, with in- 
telligent handling, is nothing short of amazing. 

If a factory whose sales are not up to the profit-paying volume, 
can spend money for advertising and thereby increase sales to the 
point where a profit is made after pacing for the advertising, who 
shall say that intelligent advertising is an expense? 

Rather is intelligent advertising expenditure an econom]) for it 
lessens expense ratios to a greater extent than its own cost, in a hank 
as Tvell as in a factory, 

A city bank with one million of deposits has hard work to make 



ends meet, with two millions it shows a nominal profit account, with 
three millions or more the profit begins to reach a satisfactory stage. 

But about the time the deposits reach two millions the bank 
staff, from the president down, is so occupied with the handling of 
the business acquired that there is little time to study how to develop 
new business. 

When this point is reached it is time for the bank to install an 
advertising department under the general direction of an expert in 
this line, with clerical help whose specific duty is to carry out the 

This department should carefully analyze costs and profits and 
study the bank's field and direct its publicity in a broad way. A 
real advertising manager is a trusted, confidential counsellor in the 
han}{s Tvork and not a mere copy writer. 

Such a department, while its costs will be charged to expense, 
and while at the start it will be an expense, will, in the end, be the 
most profitable department in the bank. 

It will work both ways, as a producer of profitable business and 
as a department for reducing costs, by lowering the expense ratio by 
means of an increasing volume of business. 

Much advertising advice is based on the desire of some adver- 
tising salesman to dispose of his wares, and is unsupported by any 
definite data as to what can be accomplished. It considers at best 
merely a detail of advertising method rather than any comprehensive 

There are comparatively few men who have had the opportu- 
nity to really k^orv anything of definite value regarding the actual 
results of bank advertising. 

Only the man who has worked intimately with, rather than for, 

a large number of banks, who has so held their confidence as to be 

trusted with the inside figures as to results, who has accumulated a 

mass of data showing the results of all kinds of business-building 

effort, is really able to analyze conditions and formulate a plan on 

which a conservative banker should care to appropriate the bank's 






But such expert knowledge is to be had and the banker who 
avails himself of it and follows an advertising campaign laid down 
on correct lines, will indeed find that he has discovered a neiv force 
in banking. 

It is no longer necessary to accept advertising theory. The 
author of this book is today and has been for some years, handling 
the advertising departments of many banks which spend liberal 
amounts and where the advertising department is first of all an 
analyticeil department. These banks expect and do receive from 
their advertising departments the same efficiency, the same shov/ing 
of results, the same exhibition of profit that they demand from all 
other departments. 

It is entirely within bounds to say that it will completely sur- 
prise the average banker who will investigate, to learn how scientif- 
ically advertising can be handled, to discover that this line of work 
has been reduced to such a definite basis that it is practicable to pre- 
dict within reasonable limits what can be accomplished by a given 
expenditure, handled in a given way. 

The analysis of costs to determine which classes of business 
pay the best profit and the methods of planning advertising to accom- 
plish an increase in these particular lines have been worked out prac- 
ticall}^ and can be proven from actual records. 

This whole subject is one of absorbing interest to the banker 
who wants his institution to grow and to make the utmost profit. 

Advertising so handled is on an entirely new plane, vastly dif- 
ferent from the old hit or miss style. It is truly a nenf force in 




Foot Note. 

To get average amount in transit daily. Compile items not con- 
vertible on da}^ received for a period of one month as follows: 

Total of (Time figured from Chicago.) 

$ 1 0,000 on St. Louis 2 14 days in transit=$ 25,000 for one day 

25,000 on Omaha 3 days in transit= 75,000 for one day 

25.000 on Spokane 8 days in transit= 200,000 for one day 

5,000 o n Grand Rapids 2 days in transit= 1 0,000 for one day 


$ 65.000 

$3 1 0,000 

$65,000 _ 

$3 1 0.000 out one day 
equals 4.7629 average days each dollar is in transit. 

equals $10,000.00 average daily amount in transit to be 
deducted from apparent balance to give true balance. 


$2,096.77 average daily deposit X 4.7629 average days 
oul=$ 10,000.00, average daily amount in transit. 


Counting Items. 

The one thing in this system of cost accounting which is most 
often questioned is the use of a per-item cost. And the criticism 
never is that the principle is incorrect, but that the work involved 
would be excessive. 

With present facilities and methods, this may be true in very 
large banks; but, once grant that a bank must know its costs, and 
that the cost of handling items is a fundamental and necessary fac- 
tor to consider in cost accounting, and there can be no question but 
that the ability of bank accountants and the ingenuity of the adding 
machine manufacturers will be equal to devising simple and easy, 
if not nearly automatic means for doing this counting. Automatic 
counting, weighing and measuring are a necessary part of the busi- 
ness system of thousands of offices and factories. 

That banks will continue for all time to render services without 
proper compensation, merely for lack of facilities for easily keeping 
account of those services, is unbelievable. 


* *-yv f--^ r ^.^, j,^ W*** 

The following method ot compiling items, written by the Aud- 
itor of a bank having assets of about $3,000,000.00 will be of in- 
terest to those who may have looked upon the counting of items as 

ji j" '*^*'*^ ^^ ^^ manner in which I arrived at the total number of items 
handled m the course of the year, in this bank, I will say that I had a sheet 
of paper ruled off in cij^it columns, the columns being headed: Commercial 
deposits, commercial checks, foreign items, clearing house items, post-office 
money orders, savings deposits, savings withdrawals, and certificates of de- 
posit. On the left hand side of the sheet, running down the page. I had the 
dates from August 1 st to August 3 1 st. I used the items handled in August, 
multiplied by twelve, to give me the estimate for the year. 

*'In this bank it is a comparatively easy matter to find the number of 
items handled each day. as all our checks, deposits, clearing house items and 
post-office orders arc run on adding machines on wide sheets, which arc filed 
away. On getting these sheets out, I first turned to that of August I st. and 
counted the commercial deposits, placing the number in the first column imder 
die heading of conunercial deposits and opposite the date of August I st. I 
then coimted the number of commercial checks on us. entering same on the 
same line, but in tfie second column. The number of savings deposits was 
entered in the third column, savings withdrawals in the fourth column, clear- 
ing house checks in the fifth, and so on. The foreign item or items sent away 
for credit or remittance, we counted by referring to the copy of the letter in 
which the items were sent away. 

"By repeating this operation for each working day during the month. 
then getting the grand total, and multiplying same by twelve, I arrived at the 
estimated number for the year. In arriving at the number of items in the 
savings dq)artment. I was obliged tp go through the savings deposit slips and 
count all items listed thereon, and deduct the total from the above total, the 
remainder being the commercial items. 

"In this bank the express orders are included in the foreign items, as 
we send them all to New York for credit. If a bank cashes express orders 
in its home town, it would be well to add another colimin to tfic item sheet. 

"In getting the number of items handled for an account under analysis, 
for the period of say one month, I counted all the items listed on the deposit 
slips, and to this total added the number of checks paid and deposits made 
as shown by the individual ledger sheet for that account In my opinion it 
would be a good plan, at the close of business each day, to make a record of 
the number of items handled during the day for each account under analysis, 
also if any foreign items are deposited, the amount and the time which it will 
take to collect the funds. 

"There are undoubtedly many banks that do not list their items on the 
adding machine, as we do. but in all banks somewhere on their records there 
is a complete itemized list, and counting the items, which appears at first 
bhish to be a staggering proposition, is in reality but the work that a junior 
clerk can do during his spare time." 





iront • 



Cost accounting in a bank. 




This book is due on the date indicated below, or at the 
expiration of a definite period after the date of borrowing, as 
provided by the library rules or by special arrangement with 
the Librarian in charge. 


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